SECTION 2. BACKGROUND

.01 Section 45Q generally allows a credit of an amount per metric ton of qualified carbon oxide captured by the taxpayer that is either: (i) disposed of in secure geological storage; (ii) used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project and disposed of in secure geological storage; or (iii) utilized in certain ways described in section 45Q(f)(5). The amount of the credit depends on the date the carbon capture equipment is placed in service and whether the qualified carbon oxide is disposed of in secure storage, used, or utilized.

.02 In the case of carbon oxide captured using carbon capture equipment that is originally placed in service at a qualified facility on or after February 9, 2018, the Section 45Q Credit is available during the 12-year period beginning on the date the equipment was originally placed in service. Although section 45Q does not define “placed in service,” the term has been defined for purposes of the investment tax credit and the deduction for depreciation. For these purposes, property is considered to be placed in service in the taxable year that the property is placed in a condition or state of readiness and availability for a specifically assigned function. See §§ 1.46‑3(d) (1)(ii) and 1.167(a)‑11(e)(1)(i) of the Income Tax Regulations.

.03 Section 704(a) provides that a partner’s distributive share of income, gain, loss, deduction, or credit is, except as otherwise provided in chapter 1 of subtitle A of the Code, determined by the partnership agreement. Section 704(b) provides that a partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof) is determined in accordance with the partner’s interest in the partnership (determined by taking into account all facts and circumstances), if: (i) the partnership agreement does not provide as to the partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof); or (ii) the allocation to a partner under the partnership agreement of income, gain, loss, deduction, or credit

(or item thereof) does not have substantial economic effect.

.04 Section 1.704-1(b)(4)(ii) provides that allocations of tax credits and tax credit recapture are not reflected by adjustments to the partners’ capital accounts (except with respect to certain investment tax credit property under section 38 of the Code). Thus, these allocations cannot have economic effect under § 1.704-1(b)(2)(ii)(b)(1), and the tax credits and tax credit recapture must be allocated in accordance with the partners’ interests in the partnership as of the time the tax credit or credit recapture arises. With respect to tax credits other than the investment tax credit provided by section 38, if a partnership expenditure (whether or not deductible) that gives rise to a tax credit in a partnership taxable year also gives rise to valid allocations of partnership loss or deduction (or other downward capital account adjustments) for the year, then the partners’ interests in the partnership with respect to the credit (or the cost giving rise to it) are in the same proportion as the partners’ respective distributive shares of the loss or deduction (and adjustments). See § 1.704-1(b)(5), Example 11. Section 1.704-1(b)(4)(ii) further provides that identical principles apply in determining the partners’ interests in the partnership regarding tax credits that arise from receipts of the partnership (whether or not taxable).

.05 A partnership exists when two or more “parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise.” Commissioner v. Culbertson, 337 U.S. 733, 742 (1949). In making this determination, courts “look not so much at the labels used by the partnership but at true facts and circumstances” to determine whether a partner has a “meaningful stake in the success or failure” of the enterprise. TIFD III-E, Inc. v. United States, 459 F.3d 220, 231 and 241 (2d Cir. 2006). A purported partner in a partnership may in substance be more properly viewed as a lender to the partnership or purchaser of partnership assets if the purported partner lacks “any meaningful downside risk or any meaningful upside potential in” the partnership. Historic Boardwalk Hall, LLC v. Commissioner, 694 F.3d 425, 455 (3d Cir. 2012).

Bulletin No. 2020–11 511 March 9, 2020