Section 1.6418-3 - [Effective 7/1/2024] Additional rules for partnerships and S corporations(a)Rules applicable to both partnerships and S corporations - (1)Partnerships and S corporations as eligible taxpayers and transferee taxpayers. Under section 6418, a partnership or an S corporation may qualify as a transferor partnership or a transferor S corporation and may elect to make a transfer election to transfer a specified credit portion to a transferee taxpayer. A partnership or an S corporation may also qualify as a transferee partnership or a transferee S corporation. This section provides rules applicable to transferor partnerships and transferor S corporations and transferee partnerships and transferee S corporations. Paragraph (b) of this section provides rules applicable solely to partnerships. Paragraph (c) of this section provides rules applicable solely to S corporations. Paragraph (d) of this section provides guidelines for the manner and due date for which a partnership or an S corporation makes an election under section 6418(a). Paragraph (e) of this section contains examples illustrating the operation of the provisions of this section. Except as provided in this section, the general rules under section 6418 and the section 6418 regulations apply to partnerships and S corporations. (2)Treatment of cash received for a specified credit portion. In the case of any specified credit portion determined with respect to any eligible credit property held directly by a partnership or an S corporation, if such partnership or S corporation makes a transfer election with respect to such specified credit portion- (i) Any amount of cash payment received as consideration for the transferred specified credit portion will be treated as tax exempt income for purposes of sections 705 and 1366 of the Code; and(ii) A partner's distributive share of such tax exempt income will be as described in paragraphs (b)(1) and (2) of this section.(3)No partner or shareholder level transfers. In the case of an eligible credit property held directly by a partnership or an S corporation, no transfer election by any partner or S corporation shareholder is allowed under § 1.6418-2 or this section with respect to any specified credit portion determined with respect to such eligible credit property.(4)Disregarded entity ownership. In the case of an eligible credit property held directly by an entity disregarded as separate from a partnership or an S corporation for Federal income tax purposes, such eligible credit property will be treated as held directly by the partnership or S corporation for purposes of making a transfer election.(5)Treatment of tax exempt income. Tax exempt income resulting from the receipt of consideration for the transfer of a specified credit portion by a transferor partnership or transferor S corporation is treated as arising from an investment activity and not from the conduct of a trade or business within the meaning of section 469(c)(1)(A). As such, any tax exempt income is not treated as passive income to any direct or indirect partners or shareholders who do not materially participate within the meaning of section 469(c)(1)(B).(6)Certain recapture events not requiring notice - (i)Indirect dispositions under section 50 -(A)Treatment of transferor partnership or transferor S corporation and transferee taxpayer. For purposes of section 6418(g)(3)(B) only, the disposition of a partner's interest under § 1.47-6(a)(2) or an S corporation shareholder's interest under § 1.47-4(a)(2) in an eligible taxpayer that is treated as a transferor partnership or transferor S corporation is disregarded. As such, provided the investment credit property that is eligible credit property owned by the transferor partnership or transferor S corporation is not disposed of, and continues to be investment credit property with respect to such transferor partnership or transferor S corporation, a transferor partnership or transferor S corporation is not required to provide notice to a transferee taxpayer of an interest disposition by the partner or shareholder because the disposition does not result in recapture under section 6418(g)(3)(B) to which the transferee taxpayer is liable, and thus, the transferee taxpayer does not have to calculate a recapture amount. (B)Treatment of partner or shareholder. A partner or an S corporation shareholder that has disposed of an interest in a transferor partnership or transferor S corporation is subject to the rules relating to such disposition under § 1.47-6(a)(2) or § 1.47-4(a)(2) , respectively. Any recapture to a disposing partner is calculated based on the partner's share of the basis (or cost) of the section 38 property to which the specified credit portion was determined in accordance with § 1.46-3(f) . Any recapture to a disposing shareholder is calculated based on the shareholder's pro rata share of the basis (or cost) of the section 38 property to which the specified credit portion was determined in accordance with § 1.48-5 . (ii)Changes in at-risk amounts under section 49 - (A)Treatment of transferor partnership or transferor S corporation and transferee taxpayer. For purposes of section 6418 only, a change in the nonqualified nonrecourse financing (as defined in section 49(a)(1)(D)) amount of any partner or shareholder of a transferor partnership or transferor S corporation, respectively, after the close of the taxable year in which the investment credit property is placed in service and the specified credit portion is determined, is disregarded. A transferor partnership or transferor S corporation is not required to provide notice to a transferee taxpayer of the change because the change does not cause recapture under section 6418(g)(3)(B) to which the transferee taxpayer is liable, and thus, the transferee taxpayer does not have to calculate a recapture amount. (B)Treatment of partner or shareholder. A partner or shareholder in a transferor partnership or transferor S corporation, respectively, must apply the rules under section 49 at the partner or shareholder level if there is a change in nonqualified nonrecourse financing with respect to the partner or shareholder after the close of the taxable year in which the investment credit property is placed in service and the specified credit portion is determined. If there is an increase in nonqualified nonrecourse financing to a partner, any adjustment under the rules of section 49(b) is calculated based on the partner's share of the basis (or cost) of the section 38 property to which the specified credit portion was determined in accordance with § 1.46-3(f) . If there is an increase in nonqualified nonrecourse financing to a shareholder, any adjustment under the rules of section 49(b) is calculated based on the shareholder's pro rata share of the basis (or cost) of the section 38 property to which the specified credit portion was determined in accordance with § 1.48-5 . If there is a decrease in nonqualified nonrecourse financing, any increase in the credit base is taken into account by the partner or shareholder as provided under section 49, and any resulting credit is not eligible for transfer under section 6418.(b)Rules applicable to partnerships -(1)Allocations of tax exempt income amounts generally. A transferor partnership must generally determine a partner's distributive share of any tax exempt income resulting from the receipt of consideration for the transfer based on such partner's proportionate distributive share of the eligible credit that would otherwise have been allocated to such partner absent the transfer of the specified credit portion (otherwise eligible credit). A partner's distributive share of an otherwise eligible credit is determined under §§ 1.46-3(f) and 1.704-1(b)(4)(ii) . Tax exempt income resulting from the receipt of consideration for the transfer of a specified credit portion by a transferor partnership is treated as received or accrued, including for purposes of section 705 of the Code, as of the date the specified credit portion is determined with respect to the transferor partnership (such as, for investment credit property, the date the property is placed in service). (2)Special rule for allocations of tax exempt income amounts and eligible credits for an election to transfer less than all eligible credits determined with respect to an eligible credit property. In the event a transferor partnership elects to transfer one or more specified credit portions of less than all eligible credits determined with respect to an eligible credit property held directly by the partnership, the partnership may allocate any tax exempt income resulting from the receipt of consideration for the specified credit portion(s) in accordance with the rules in this paragraph (b)(2). (i) First, the partnership must determine each partner's distributive share of the otherwise eligible credits with respect to such eligible credit property in accordance with paragraph (b)(1) of this section (partner's eligible credit amount).(ii) Thereafter, the transferor partnership may determine, in any manner described in the partnership agreement, or as the partners may agree, the portion of each partner's eligible credit amount to be transferred, and the portion of each partner's eligible credit amount to be retained and allocated to such partner. The partnership may allocate to each partner its agreed upon share of eligible credits, tax exempt income resulting from the receipt of consideration for the specified credit portion(s), or both, as the case may be, provided that- (A) The amount of eligible credits allocated to each partner cannot exceed such partner's eligible credit amount; and(B) Each partner is allocated its proportionate share of tax exempt income resulting from the transfer(s).(iii) Each partner's proportionate share of tax exempt income resulting from the transfer(s) is equal to the total amount of tax exempt income resulting from the transfer(s) of the specified credit portion(s) by the partnership multiplied by a fraction-(A) The numerator of which is such partner's eligible credit amount minus the amount of eligible credits actually allocated to such partner with respect to the eligible credit property for the taxable year; and(B) The denominator of which is the specified credit portion(s) transferred by the partnership with respect to the eligible credit property for the taxable year.(3)Transferor partnerships in tiered structures. If a partnership (upper-tier partnership) is a direct or indirect partner of a transferor partnership and directly or indirectly receives-(i) An allocation of an eligible credit, the upper-tier partnership is not an eligible taxpayer under section 6418 with respect to any eligible credit allocated by a transferor partnership; or(ii) An allocation of tax exempt income resulting from the receipt of consideration for the transfer of a specified credit portion by a transferor partnership, the upper-tier partnership must determine its partners' distributive shares of such tax exempt income in proportion to the partners' distributive shares of the otherwise eligible credit as provided in paragraph (b)(1) of this section.(4)Partnership as a transferee taxpayer -(i)Eligibility under section 6418. A partnership may qualify as a transferee partnership to the extent it is not related (within the meaning of section 267(b) or 707(b)(1)) to an eligible taxpayer. A transferee partnership is subject to the no additional transfer rule in § 1.6418-2(c)(2), however, an allocation of a transferred specified credit portion to a direct or indirect partner of a transferee partnership under section 704(b) is not a transfer for purposes of section 6418. (ii)Treatment of a cash payment for a transferred specified credit portion. A cash payment by a transferee partnership as consideration for a transferred specified credit portion is treated as an expenditure described in section 705(a)(2)(B).(iii)Allocations of transferred specified credit portions. A transferee partnership must determine each partner's distributive share of any transferred specified credit portion based on such partner's distributive share of the nondeductible expenses for the taxable year used to fund the purchase of such transferred specified credit portion. Each partner's distributive share of the nondeductible expenses used to fund the purchase of any transferred specified credit portion is determined by the partnership agreement, or, if the partnership agreement does not provide for the allocation of nondeductible expenses paid pursuant to section 6418, then the allocation of the specified credit portion is based on the transferee partnership's general allocation of nondeductible expenses.(iv)Transferred specified credit portion treated as an extraordinary item. A transferred specified credit portion is treated as an extraordinary item and must be allocated among the partners of a transferee partnership as of the time the transfer of the specified credit portion to the transferee partnership is treated as occurring in accordance with this paragraph (b)(4)(iv) and § 1.706-4(e)(1) and (e)(2)(ix) . If the transferee partnership and eligible taxpayer have the same taxable years, the transfer of a specified credit portion to a transferee partnership is treated as occurring on the first date that the transferee partnership makes a cash payment to the eligible taxpayer as consideration for the specified credit portion. If the transferee partnership and eligible taxpayer have different taxable years, the transfer of a specified credit portion to a transferee partnership is treated as occurring on the later of- (A) The first date of the taxable year that the transferee partnership takes the specified credit portion into account under section 6418(d); or(B) The first date that the transferee partnership makes a cash payment to the eligible taxpayer for the specified credit portion.(v)Transferee partnerships in tiered structures. If an upper-tier partnership is a direct or indirect partner of a transferee partnership and directly or indirectly receives an allocation of a transferred specified credit portion, the upper-tier partnership is not an eligible taxpayer under section 6418 with respect to the transferred specified credit portion. The upper-tier partnership's distributive share of the transferred specified credit portion is treated as an extraordinary item to the upper-tier partnership and must be allocated among the partners of the upper-tier partnership as of the time the transfer of the specified credit portion to the transferee partnership is treated as occurring in accordance with paragraph (b)(4)(iv) of this section and § 1.706-4(e)(1) and (e)(2)(ix) , regardless of whether the transferee partnership and upper-tier partnership have different taxable years under section 706(b). The upper-tier partnership must report the credits to its partners in accordance with guidance.(c)Rules applicable to S corporations -(1)Pro rata shares of tax exempt income amounts. Each shareholder of a transferor S corporation must take into account such shareholder's pro rata share (as determined under section 1377(a) of the Code) of any tax exempt income resulting from the receipt of consideration for the transfer. Tax exempt income resulting from the receipt of consideration for the transfer of a specified credit portion by a transferor S corporation is treated as received or accrued, including for purposes of section 1366, as of the date the specified credit portion is determined with respect to the transferor S corporation (such as, for investment credit property, the date the property is placed in service). (2)S corporation as a transferee taxpayer -(i)Eligibility under section 6418. An S corporation may qualify as a transferee taxpayer to the extent it is not related (within the meaning of section 267(b) or 707(b)(1)) to an eligible taxpayer (transferee S corporation). A transferee S corporation is subject to the no additional transfer rule in § 1.6418-2(c)(2), however, an allocation of a transferred specified credit portion to a direct or indirect shareholder of a transferee S corporation is not a transfer for purposes of section 6418. (ii)Treatment of a cash payment for a transferred specified credit portion. A cash payment by a transferee S corporation as consideration for a transferred specified credit portion is treated as an expenditure described in section 1367(a)(2)(D) of the Code.(iii)Pro rata shares of transferred specified credit portions. Each shareholder of a transferee S corporation must take into account such shareholder's pro rata share (as determined under section 1377(a)) of any transferred specified credit portion. If the transferee S corporation and eligible taxpayer have the same taxable years, the transfer of a specified credit portion is treated as occurring to a transferee S corporation during the transferee S corporation's permitted year (as defined under sections 444 and 1378(b)) that the transferee S corporation first makes a cash payment as consideration to the eligible taxpayer for the specified credit portion. If the transferee S corporation and eligible taxpayer have different taxable years, then the transfer of a specified credit portion is treated as occurring to a transferee S corporation during the transferee S corporation's first permitted year (as defined under sections 444 and 1378(b)) ending with or after, the taxable year of the eligible taxpayer to which the transferred specified credit portion was determined.(d)Transfer election by a partnership or an S corporation - (1)In general. A partnership or an S corporation may make a transfer election to transfer a specified credit portion under section 6418 if it files an election in accordance with the rules set forth in this paragraph (d). A transfer election is made on the basis of an eligible credit property and only applies to the specified credit portion identified in the transfer election by such partnership or S corporation in the taxable year for which the election is made. (2)Manner and due date of making a transfer election. A transfer election for a specified credit portion must be made in the manner provided in § 1.6418-2(b)(1) through (3). All documents required in § 1.6418-2(b)(1) through (3) must be attached to the partnership or S corporation return for the taxable year during which the transferred specific credit portion was determined. For the transfer election to be valid, the return must be filed not later than the time prescribed by §§ 1.6031(a)-1(e) and 1.6037-1(b) (including extensions of time) for filing the return for such taxable year. No transfer election may be made for the first time on an amended return, withdrawn on an amended return, or made or withdrawn by filing an administrative adjustment request under section 6227 of the Code. A numerical error with respect to a properly claimed transfer election may be corrected on an amended return or by filing an administrative adjustment request under section 6227 if necessary; however, the partnership or S corporation's original return, which must be signed under penalties of perjury, must contain all of the information, including a registration number, required by these final regulations. In order to correct an error on an amended return or administrative adjustment request under section 6227, a partnership or an S corporation must have made an error in the information included on the original return such that there is a substantive item to correct; a partnership or an S corporation cannot correct a blank item or an item that is described as being "available upon request." There is no late-election relief available under §§ 301.9100-1 or 301.9100-3 of this chapter for a transfer election that is not timely filed; however, relief under § 301.9100-2(b) may apply if the partnership or S corporation has not received an extension of time to file a return after the original due date, has timely filed a return, takes corrective action under § 301.9100-2(c) within the six-month extension period, and meets the procedural requirements outlined in § 301.9100-2(d) .(3)Irrevocable election. A transfer election by a partnership or an S corporation is irrevocable.(e)Examples. The examples in this paragraph (e) illustrate the application of paragraphs (a)(6), (b), and (c) of this section. (1)Example 1. Transfer of all eligible credits by a transferor partnership - (i)Facts. A and B each contributed $150X of cash to AB partnership for the purpose of investing in energy property. The partnership agreement provides that A and B share equally in all items of income, gain, loss, deduction, and credit of AB partnership. AB partnership invests $300X in an energy property in accordance with section 48 and places the energy property in service on date X in year 1. As of the end of year 1, AB partnership has $90X of eligible credits under section 48 with respect to the energy property. Before AB partnership files its tax return for year 1, AB partnership transfers the $90X of eligible credits to an unrelated transferee taxpayer, Transferee Taxpayer X for $80X and executes a transfer election statement with Transferee Taxpayer X. (ii)Analysis. Under § 1.6418-3(b)(1), AB partnership allocates the tax exempt income resulting from the transfer of the specified credit portion proportionately among the partners based on each partner's distributive share of the otherwise eligible section 48 credit as determined under §§ 1.46-3(f) and 1.704-1(b)(4)(ii) . Under § 1.46-3(f)(2) , each partner's share of the basis of the energy property is determined in accordance with the ratio in which the partners divide the general profits (or taxable income) of the partnership. Under the AB partnership agreement, A and B share partnership profits equally. Thus, each partner's share of the basis of the energy property under § 1.46-3(f) and distributive share of the otherwise eligible credits under § 1.704-1(b)(4)(ii) is 50 percent. The transfer made pursuant to section 6418(a) causes AB partnership's eligible credits under section 48 with respect to the energy property to be reduced to zero, and the consideration of $80X received by AB partnership for the transferred specified credit portion is treated as tax exempt income. Because the tax exempt income is allocated in the same proportion as the otherwise eligible credit would have been allocated, A and B will each be allocated $40X of tax exempt income. Each of partner A's and partner B's basis in its partnership interest and capital account will be increased by $40X. Also in year 1, the basis in the energy property held by AB partnership and with respect to which the credit is calculated is reduced under section 50(c)(3) by 50 percent of the amount of the credit so determined, or $45X. A's and B's basis in their partnership interests and capital accounts will be appropriately adjusted to take into account adjustments made to the energy property under section 50(c)(5) and § 1.704-1(b)(2)(iv) (j). The tax exempt income received or accrued by AB partnership as a result of the transferred specified credit portion is treated as received or accrued, including for purposes of section 705, as of date X in year 1, which is the date the transferred specified credit portion was determined with respect to AB partnership.(2)Example 2. Recapture to a transferor partnership -(i)Facts. Assume the same facts as in paragraph (e)(1)(i) of this section (Example 1), except in year 3, within the recapture period related to the energy property, A reduces its proportionate interest in the general profits of the partnership by 50 percent causing a recapture event to A under § 1.47-6(a)(2) . The energy property is not disposed of by AB partnership and continues to be energy property with respect to AB partnership. (ii)Analysis. AB partnership should not provide notice of recapture to Transferee Taxpayer X as a result of the recapture event under § 1.47-6(a)(2) with respect to A. Transferee Taxpayer X is not liable for any recapture amount. A, however, is subject to recapture as provided in § 1.47-6(a)(2) and based on its share of the basis (or cost) of the energy property to which the eligible credits were determined under § 1.46-3(f)(2) .(3)Example 3. Transfer of a portion of eligible credits by a transferor partnership - (i)Facts. C and D each contributed cash to CD partnership for the purpose of investing in a qualified wind facility. The partnership agreement provides that until a flip point, C is allocated 99 percent of all items of income, gain, loss, deduction and credit of CD partnership and D is allocated the remaining 1 percent of such items. After the flip point, C is allocated 5 percent of all items of income, gain, loss, deduction and credit of CD Partnership and D is allocated 95 percent of such items. CD partnership invests in a qualified wind facility and places the facility in service in year 1. CD partnership generates $100X of credit under section 45(a) for year 1. Before the due date for CD partnership's year 1 tax return (with extension), C and D agree that D's share of the eligible credit will be transferred, and C will be allocated its share of eligible credit. CD partnership transfers $1X of the eligible credit to an unrelated transferee taxpayer for $1X. The flip point has not been reached by the end of year 1. (ii)Analysis. Under paragraph (b)(2) of this section, CD partnership must first determine each partner's eligible credit amount, which is equal to such partner's distributive share of the otherwise eligible section 45(a) credit as determined under § 1.704-1(b)(4)(ii) . Under § 1.704-1(b)(4)(ii) , for an eligible credit that is not an investment tax credit, allocations of credit are deemed to be in accordance with the partner's interest in the partnership if the credit is allocated in the same proportion as the partners' distributive share of the receipts that give rise to the credit. The CD partnership agreement provides that until the flip point, C is allocated 99 percent of all items of income, gain, loss, deduction and credit of CD partnership and D is allocated the remaining 1 percent of such items. Assuming all requirements of the safe harbor provided for in Revenue Procedure 2007-65, 2007-2 CB 967 are met, CD partnership's allocations of the otherwise eligible credits would be respected as in accordance with section 704(b). Thus, partner C's and partner D's distributive share of the otherwise eligible credit is 99 percent and 1 percent, respectively. C and D have agreed to sell D's eligible credit amount of $1X for full value and to allocate to C its eligible credit amount of $99X. The transfer made pursuant to section 6418(a) causes CD partnership's eligible credits under section 45(a) with respect to the wind facility to be reduced to $99X, and the consideration of $1X received by CD partnership is treated as tax exempt income. D is allocated $1X of tax exempt income from the transfer of the eligible credits, and C is allocated $99X of eligible credits under section 45(a) with respect to the wind facility. Neither C nor D is allocated more eligible credits than its eligible credit amount. Additionally, D is allocated an amount of tax exempt income equal to $1X * (1 - 0)/1 and C is allocated none of the tax exempt income. The allocations of eligible credits and tax exempt income are permissible allocations under paragraph (b)(2) of this section.(4)Example 4. Upper-tier partnership of a transferor partnership -(i)Facts. E, F, and G each contributed $100X of cash to EFG partnership for the purpose of investing in an energy property. E, F, and G are partnerships for Federal income tax purposes. The partnership agreement provides that E, F and G share equally in all items of income, gain, loss, and deduction of EFG partnership. EFG partnership invests $300X in an energy property in accordance with section 48 and places the energy property in service in year 1. As of the end of year 1, EFG partnership has $90X of eligible credits under section 48 with respect to the energy property. Before the due date for EFG partnership's year 1 tax return (with extension), E, F and G agree that E's share of the eligible credits will be transferred, and F and G will each be allocated their shares of eligible credits (or basis). EFG partnership transfers $30X of the eligible credits to an unrelated transferee taxpayer for $25X. Assuming the allocations to E, F and G of the eligible credits and tax exempt income resulting from the receipt of cash for the transferred specified credit portion are permissible allocations under paragraph (b)(2) of this section, E is allocated $25X of tax exempt income from the transfer of the eligible credits and F and G are each allocated $30X of eligible credits with respect to the energy property. (ii)Analysis. E must allocate the $25X of tax exempt income to its partners as if it had retained its share of the eligible credits. Under § 1.46-3(f)(2) , each partner's share of the basis of the section 48 energy property is determined in accordance with the ratio in which the partners divide the general profits (or taxable income) of the partnership. The E partnership agreement provides for equal allocations of income, gain, deduction, and loss to its partners, and thus, E partnership must allocate the otherwise eligible credits in the same manner. Therefore, E partnership must allocate the $25X of tax exempt income equally among its partners. In accordance with paragraph (b)(3)(i) of this section, F and G do not qualify as an eligible taxpayer for purposes of section 6418 and thus, are not permitted to make a transfer election for any portion of the $30X of eligible credit allocated to them by EFG partnership. Under § 1.46-3(f)(2) , each partner's share of the basis of the section 48 energy property is determined in accordance with the ratio in which the partners divide the general profits (or taxable income) of the partnership. The F and G partnership agreements provide for equal allocations of income, gain, deduction, and loss to its partners, and F and G must allocate the basis from the energy property to their partners in the same manner.(5)Example 5. Transferee partnership -(i)Facts. Y and Z each contributed $50X of cash to YZ partnership for the purpose of purchasing eligible section 45 credits under section 6418. The partnership agreement provides that all items of income, gain, loss, deduction, and credit are shared equally among Y and Z. The partnership agreement also provides that any nondeductible expenses used to fund the purchase of any transferred specified credit portion will be shared equally among Y and Z. On date X in year 1, YZ partnership qualifies as a transferee taxpayer and makes a cash payment of $80X to an eligible taxpayer for $100X of a transferred specified credit portion. The eligible credits will be determined with respect to the eligible taxpayer as of the end of year 1. Both YZ partnership and the eligible taxpayer are calendar year taxpayers. (ii)Analysis. The cash payment of $80X made by YZ partnership for the transferred specified credit portion is treated as a nondeductible expenditure under section 705(a)(2)(B). Under paragraph (b)(4)(iii) of this section, YZ partnership must determine each partner's distributive share of the transferred specified credit portion based on such partner's distributive share of the nondeductible expenses for the taxable year used to fund the purchase of such transferred specified credit portion. The YZ partnership agreement provides that nondeductible expenses used to fund the purchase of any transferred specified credit portion will be shared equally among Y and Z and thus, the transferred specified credit portion is also shared equally among Y and Z. The transferred specified credit portion is treated as an extraordinary item under § 1.706-4(e)(2)(ix) that is deemed to occur on date X in year 1. As of date X in year 1, each of Y and Z are allocated $40X of a section 705(a)(2)(B) expenditure with respect to the cash payment for the transferred specified credit portion and $50X of transferred section 45 credits.(6)Example 6. Upper-tier partnership of a transferee partnership -(i)Facts. Assume the same facts as in paragraph (e)(5)(i) of this section (Example 5), except Y is a partnership for Federal tax purposes, and Z is a U.S. C corporation for Federal tax purposes (as defined in section 1361(a)(2) of the Code). (ii)Analysis. In accordance with paragraph (b)(4)(v) of this section, Y does not qualify as an eligible taxpayer for purposes of section 6418 for that portion of the transferred specified credit portion allocated to it by YZ partnership. Under paragraph (b)(4)(iii) of this section, Y must determine each partner's distributive share of the transferred specified credit portion based on such partner's distributive share of the nondeductible expenses for the taxable year used to fund the purchase of such transferred specified credit portion. The Y partnership agreement provides that all items of income, gain, loss, deduction, and credit are shared equally. The partnership agreement also provides that any nondeductible expenses used to fund the purchase of any specified credit portion are shared equally. Thus, the transferred specified credit portion must be shared equally among the partners of Y. Y's distributive share of the transferred specified credit portion is treated as an extraordinary item to Y and must be allocated among the partners of Y as of date X in year 1, which is when the item is deemed to occur to YZ partnership, regardless of whether Y and YZ partnership have the same taxable years under section 706(b).(7)Example 7. Transferor S corporation -(i)Facts. V and W each contributed $150X of cash to an S corporation for the purpose of investing in energy property. The S corporation invests $300X in an energy property in accordance with section 48 and places the energy property in service on date X in year 1. As of the end of year 1, the S corporation has $90X of eligible credits under section 48 with respect to the energy property. Before the due date for the S corporation's year 1 tax return (with extension), the S corporation transfers the $90X of eligible credits to an unrelated transferee taxpayer for $80X. (ii)Analysis. The transfer made pursuant to section 6418(a) causes the S corporation's eligible credits under section 48 with respect to the energy property to be reduced to zero, and the consideration of $80X received by the S corporation for the transferred specified credit portion is treated as tax exempt income. Under paragraph (c)(1) of this section, each of V and W must take into account its pro rata share (as determined under section 1377(a)) of any tax exempt income resulting from the receipt of consideration for the transfer of the eligible credit, or $40X. Under section 1367(a)(1)(A), each of the shareholder's basis in its stock will be increased by $40X. Also in year 1, the basis in the energy property with respect to which the credit is calculated is reduced under section 50(c)(3) by 50 percent of the amount of the credit so determined, or $45X. The tax exempt income received or accrued by the S corporation as a result of the transfer of the specified credit portion is treated as received or accrued, including for purposes of section 1366, as of date X in year 1, which is the date the transferred specified credit portion was determined with respect to the transferor S corporation.(8)Example 8. Transferee S corporation -(i)Facts. J and K each contributed $50X of cash to an S corporation for the purpose of purchasing eligible section 48 credits under section 6418. At the beginning of year 2, the S corporation qualifies as a transferee taxpayer and makes a cash payment of $80X to an eligible taxpayer for $100X of a transferred specified credit portion. The transferred specified credit portion was determined with respect to the eligible taxpayer for energy property placed in service in year 1. Both the S corporation and the eligible taxpayer are calendar year taxpayers. (ii)Analysis. The cash payment of $80X made by the S corporation for the transferred specified credit portion is treated as an expenditure described in section 1367(a)(2)(D). Each of J and K must take into account its pro rata share (as determined under section 1377(a)) of the transferred specified credit portion. The transferred specified credit portion is deemed to arise for purposes of sections 1366 and 1377 during year 2 of the S corporation. For year 2, each of J and K take into account $40X of a section 1367(a)(2)(D) expenditure with respect to the cash payment for the transferred specified credit portion and $50X of transferred section 48 credits.(f)Applicability date. This section applies to taxable years ending on or after April 30, 2024. For taxable years ending before April 30, 2024, taxpayers, however, may choose to apply the rules of this section and §§ 1.6418-1, -2, and -5, provided the taxpayers apply the rules in their entirety and in a consistent manner.