Tax News Update    Email this document    Print this document  

December 4, 2023

IRS rules that restructuring will not result in credit recapture

  • This ruling shows the IRS is amenable to issuing rulings on investment tax credit (ITC) deals for companies considering moving tax equity investments around within their consolidated group to optimize their structure without the tax credits being recaptured.
  • This ruling helpfully indicates that, under the right circumstances, Treas. Reg. Section 1.1502-3(f)(2)(i) is applicable to ITC deals despite its reference to ITCs and recapture rules that are no longer in the tax code. In this regard, taxpayers should be mindful that the representations required by the IRS are substantial.
  • Based on this ruling, it appears the IRS thinks the law around the current application of Treas. Reg. Section 1.1502-3(f)(2)(i) is unclear.

In PLR 202347009, the IRS ruled that a proposed transaction in which a consolidated group is restructured will not result in any credit recapture under IRC Section 50I.


Parent is the common parent of an affiliated group of corporations that file a consolidated federal income tax return. Parent owns all the stock of group members M1 and M2. M1 owns interests in nine partnerships (Partnerships) that have invested in renewable energy projects that generate IRC Section 48 tax credits. The energy property in the projects is subject to recapture under IRC Section 50.1

M1 proposes to transfer its interests in the Partnerships to M2 by (1) forming a new subsidiary (NewCo), (2) transferring its direct and indirect interests in the Partnerships to NewCo for no consideration, (3) distributing all its stock in NewCo to Parent and (4) having Parent contribute all the NewCo stock to M2 for no consideration.2

The taxpayer represents, among other things, that:

  • The proposed transaction will not cause any of the Partnerships to terminate.
  • The proposed transaction will result in recapture under IRC Section 50 absent application of the regulations under IRC Section 1502.
  • M2 does not intend to dispose of the interests in the Partnerships before the close of the IRC Section 50 recapture period.
  • The proposed transaction will not result in basis adjustments under IRC Section 743(b) by any of the Partnerships.


ITC overview

IRC Section 38(a) allows a general business credit against tax that includes the amount of the current year business credit. Generally, under IRC Section 38(b)(1), the amount of the current year business credit includes, among other tax credits, the IRC Section 46 ITC, which is comprised of several other tax credits, including the energy credit under IRC Section 48. For purposes of IRC Section 46, IRC Section 48(a) provides generally that the energy credit for any tax year is the energy percentage of the basis of each energy property placed in service during the tax year.

Under Treas. Reg. Section 1.46-3(f), which was promulgated before the enactment of IRC Section 50, when the energy property in question is acquired by a partnership, a look-through concept is applied, allowing each partner to take into account separately its share of the basis of the partnership’s IRC Section 38 property. The term “IRC Section 38 property” was replaced with the term “investment credit property” (which generally refers to any property eligible for the ITC) in current IRC Section 50(a)(5)(A).

ITC recapture

The ITC is subject to the recapture rules currently set forth in IRC Section 50. The ITC recapture rules were promulgated in 1966, and originally fell under IRC Section 47, but in 1990, the Revenue Reconciliation Act of 1990 (P. L. 101-58) repealed former IRC Section 47 and enacted new IRC Section 50, which remains in effect today. IRC Section 50(a)(1) generally allows for the recapture of some amount of the ITC claimed if, during any tax year, investment credit property is disposed of or otherwise ceases to be investment credit property with respect to the taxpayer before the close of the recapture period. Currently, there are no regulations under IRC Section 50 addressing ITC recapture.

Treas. Reg. Section 1.47-6(a)(2), which was promulgated before the enactment of IRC Section 50, supplies corresponding recapture rules with respect to IRC Section 38 property held by a partnership and generally provides a look-through concept, which allows each partner to take into account separately its share of the recapture amount.

ITC recapture in consolidated groups

Although certain dispositions result in credit recapture, including, in general, dispositions of investment credit property by a consolidated group member, Treas. Reg. Section 1.1502-3(f)(2)(i) creates a special exception under which certain intercompany transfers are not treated as a disposition that would otherwise lead to a recapture determination:

[In general], a transfer of [IRC S]ection 38 property from one member of the group to another member of such group during a consolidated return year shall not be treated as a disposition or cessation within the meaning of [IRC S]ection 47(a)(1).

In Revenue Ruling 75-245, the IRS extended the application of Treas. Reg. Section 1.1502-3(f)(2)(i) to intercompany transfers of partnership interests where the partnership is the owner of the investment credit property.

Both Treas. Reg. Section 1.1502-3(f)(2)(i) and Revenue Ruling 75-245 were written in the context of an analysis of former IRC Section 47 and not current IRC Section 50 and, thus, are out of date.


The IRS ruled that the proposed transaction will not result in any credit recapture under IRC Section 50 and referred to Treas. Reg. Section 1.1502-3(f)(2)(i) with no further explanation.


Recent changes in the non-tax regulations for banks, which make up a large portion of the tax equity market, have resulted in some financial institutions looking to move investments between entities within the consolidated group. These institutions, however, may be concerned that doing so could result in IRC Section 50 recapture despite the rules in Treas. Reg. Section 1.1502-3(f)(2)(i), which are out of date; that is, the credit rules referenced in Treas. Reg. Section 1.1502-3(f)(2)(i) have been repealed, modified and relocated since Treas. Reg. Section 1.1502-3(f)(2)(i) was promulgated and, thus, Treas. Reg. Section 1.1502-3(f)(2)(i) may not represent current law with respect to IRC Section 50 recapture. This PLR appears to confirm that, despite changes to the underlying credit rules, Treas. Reg. Section 1.1502-3(f)(2)(i) continues to represent current law (or at least the current view of the IRS).

Because the IRS will not rule on issues that are clearly addressed in judicial or administrative guidance (known as a comfort ruling), its decision to rule on this issue suggests that the IRS does not think the law is clear on how Treas. Reg. Section 1.1502-3(f)(2)(i) currently applies. Given this lack of clarity, taxpayers may wish to secure a PLR before taking this position.


Contact Information
For additional information concerning this Alert, please contact:
Tax Credit Investment Advisory Services
   • Michael Bernier (
National Tax M&A Group - International Tax and Transaction Services
   • Steve Fattman (
   • Brian Peabody (

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor


1 IRC Section 50(a)(1) generally requires a taxpayer's tax liability to be increased by the recapture percentage of the aggregate decrease in the credits allowed under IRC Section 38 from all prior tax years. The recapture rule applies if, during any tax year, the taxpayer disposes of investment credit property, or the property ceases to be investment credit property before the close of the recapture period.

2 The IRS did not rule on the characterization or tax treatment of these steps beyond the recapture ruling described below.