SECTION 4. SAFE HARBOR

This section 4 sets forth the Safe Harbor under which the IRS will treat partnerships as properly allocating the Section 45Q Credit in accordance with section 704(b). If a Project Company and its partners do not satisfy each of the requirements in this section 4, the Project Company and its partners do not qualify for the Safe Harbor.

.01 Investors Defined . Investors hold an interest in the Project Company (Partnership Interest) as described in section 4.02(2) of this revenue procedure. An Investor may be an initial partner in the Project Company or may later become an Investor by acquiring an interest in the Project Company either directly from the Project Company by contribution or from another partner by purchase.

.02 Partners’ Partnership Interests . (1) Developer’s Minimum Partnership Interest . The Developer must have a minimum one percent Partnership Interest in each material item of partnership income, gain, loss, deduction, and credit at all times during the existence of the Project Company.

(2) Investor’s Partnership Interest . (a) Investor’s Minimum Partnership Interest . Each Investor must have, at all times during the period it owns a Partnership Interest, a minimum interest in each material item of partnership income, gain, loss, deduction, and credit equal to at least five percent of the Investor’s percentage interest in each such item for the taxable year for which the Investor’s percentage share of that item is the largest (as adjusted for sales, redemptions, or dilutions of its interest).

(b) Requirements Regarding the Inves- tor’s Partnership Interest . The Investor’s Partnership Interest must constitute a bona fide equity investment with a reasonably anticipated value commensurate with the Investor’s overall percentage interest in the Project Company, separate from any

federal, state, and local tax deductions, allowances, credits, and other tax attributes to be allocated by the Project Company to the Investor. An Investor’s Partnership Interest is a bona fide equity investment only if that reasonably anticipated value is contingent upon the Project Company’s net income, gain, and loss, and is not substantially fixed in amount. Likewise, the Investor must not be substantially protected from losses from the Project Company’s activities. The Investor’s return from its investment in the Project Company must not be limited in a manner comparable to a preferred return representing a payment for capital.

(c) Arrangements to Reduce the Val- ue of the Investor’s Partnership Interest or the Investor’s Economic Return . The value of the Investor’s Partnership Interest may not be reduced through fees (including developer, management, and incentive fees), or other arrangements, that are unreasonable compared with fees or other arrangements for a carbon oxide capture and utilization or sequestration project that does not qualify for the Section 45Q Credit, and may not be reduced by disproportionate rights to distributions or by issuances of interests in the Project Company (or rights to acquire interests in the Project Company) for less than fair market value consideration.

.03 Investor’s Minimum Unconditional Investment . On the date the Investor acquires a Partnership Interest, the Investor must make a minimum unconditional investment with respect to the Project Company (Investor Minimum Investment). The Investor must maintain the Investor Minimum Investment throughout the duration of its ownership of its Partnership Interest, except that the Investor Minimum Investment may be reduced as a result of distributions of cash flow from the Project Company’s operation of the Equipment. Investments required to be made by the Investor in the future will not be included in the Investor Minimum Investment until the investment is actually made with respect to the partnership. The Investor Minimum Investment must be equal to at least 20 percent of the sum of the fixed capital investment plus any reasonably anticipated contingent investment required to be made by the Investor under the partnership agreement. The Investor

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must not be protected against loss of any portion of the Investor Minimum Investment through any arrangement, directly or indirectly, with: the Developer; any other Investor; an Emitter; an Offtaker; or any person related to the Developer, other Investors, an Emitter, or an Offtaker.

.04 Contingent Consideration . More than 50 percent of the sum of the fixed investment plus reasonably anticipated contingent investment to be made by an Investor with respect to a Partnership Interest must be fixed and determinable obligations that are not contingent in amount or certainty of payment. Contributions to the Project Company to pay ongoing operating expenses will not be treated as part of the Investor’s contingent investment for purposes of this requirement.

.05 Purchase Rights . Neither the Developer, the Investors, nor any related person may have a call option or other contractual right or agreement to purchase, at any time, the Equipment, any property included in the Equipment, or a Partnership Interest at a future date (other than a contractual right or agreement for a present sale).

.06 Sale Rights . An Investor may not have a contractual right or other agreement to require any person involved in any part of the carbon capture transaction to purchase or liquidate the Investor’s Partnership Interest at a future date at a price that is more than its fair market value determined at the time of exercise of the contractual right to sell.

.07 Determination of Fair Market Val- ue . Solely for the purposes of this revenue procedure, any determination of the fair market value of the Equipment or a Partnership Interest may take into account contracts or other arrangements creating rights or obligations only if such contracts or other arrangements creating rights or obligations are entered into in the ordinary course of the Project Company’s business and are negotiated at arm’s length.

.08 Guarantees and Loans . (1) No person involved in any part of the Project Company may directly or indirectly guarantee or otherwise insure the Investor’s ability to claim the Section 45Q Credit, the cash equivalent of the credits, or the repayment of any portion of the Investor’s contribution due to inability to claim the Section 45Q Credit, in the event

that the IRS challenges all or a portion of the transactional structure of the partnership. Further, no person involved in any part of the Project Company (or any related person) may guarantee that the Investor will receive distributions from the Project Company or consideration in exchange for its interest in the Project Company (except for a fair market value sale right described in section 4.06 of this revenue procedure). This requirement does not prohibit the Investor from procuring insurance, including recapture insurance, from persons not related to the Developer, any other Investor, an Emitter, or an Offtaker.

(2) The following guarantees may be provided to the Investor or the Project Company: (i) guarantees for the performance of any acts necessary to claim the Section 45Q Credit (including ensuring proper secure geological storage of the qualified carbon oxide through disposal, or use as a tertiary injectant, or utilization); and (ii) guarantees for the avoidance of any act (or omissions) that would cause the Project Company to fail to qualify for the Section 45Q Credit or that would result in a recapture of the Section 45Q Credit. Examples of guarantees permitted under this section include completion guarantees, operating deficit guarantees, environmental indemnities, and financial covenants.

(3) A long-term carbon oxide purchase agreement entered into on arm’s-length terms between the Project Company and an Emitter, between the Project Company and an Offtaker, or between an Emitter and an Offtaker, does not constitute a guarantee even if the Emitter or the Offtaker is related to the Project Company, and even if such contracts contain “supply all,” “supply-or-pay,” “take all,” “take-or-pay,” or “securely-store-or-pay” provisions. A long-term contract between the Project Company and the Emitter or the Offtaker pursuant to which the Project Company leases the equipment to the Emitter or the Offtaker or agrees to use the Equipment to perform services for the Emitter or the Offtaker also does not constitute a guarantee even if the Emitter or the Offtaker is related to the Project Company.

(4) The Developer (or a person related to the Developer) may not lend any Investor the funds to acquire any part of the Investor’s interest in the Project Company

or guarantee any indebtedness incurred or created in connection with the acquisition of such Investor’s interest in the Project Company.

.09 Allocation of the Section 45Q Cred- it . Allocations under the Project Company’s partnership agreement must satisfy the requirements of section 704(b) and the regulations thereunder. The Section 45Q Credit and any recapture of the Section 45Q Credit must be allocated in accordance with § 1.704-1(b)(4)(ii). If the Project Company generates receipts from its activities relating to carbon oxide sequestration (such as payments for capturing qualified carbon oxide or for the sale of qualified carbon oxide), and those receipts give rise to valid allocations of partnership income, an allocation of the Section 45Q Credit in the same proportion as the partners’ respective distributive shares of such income will be treated as in accordance with the partners’ interests in the partnership for this purpose. If the Project Company does not receive payments for its activities relating to carbon oxide sequestration, an allocation of the Section 45Q Credit in the same proportion as the partners’ respective distributive shares of the loss or deduction (or other downward capital account adjustments) associated with the cost of the capture and disposal, use as a tertiary injectant, or utilization of the qualified carbon oxide will be treated as in accordance with the partners’ interests in the partnership for this purpose.