SECTION 5. EXAMPLE

This section 5 provides an example of a valid allocation of the Section 45Q Credit by a limited liability company (LLC) that is classified as a partnership for federal income tax purposes.

.01 Facts. (1) The Developer is a C corporation for federal income tax purposes that owns and operates carbon capture projects. The Developer may also use carbon oxide for enhanced oil recovery. The Project Company is an LLC classified as a partnership for federal income tax purposes that has been formed by the Developer to own and manage a carbon capture project that: (i) owns Equipment; (ii) has rights to capture carbon oxide from an Emitter; and (iii) sells the carbon oxide to an Offtaker

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(which may be the Developer and may be a partner). The Investor is a C corporation for federal income tax purposes that invests in carbon capture projects primarily to benefit from the Section 45Q Credit. The Developer will assign to the Project Company a number of contracts or agreements relating to the development of the carbon capture project.

(2) The Developer will cause the Equipment to be constructed and placed in service. Construction of the Equipment will be financed with $100x of construction financing. At some point before the Equipment is placed in service, the Developer will contribute the Equipment to the Project Company. The Investor will contribute $10x to the Project Company in exchange for an interest in the Project Company. The Investor’s contribution of $10x is 20 percent of the Investor’s total agreed investment of $50x.

(3) The Project Company will be a party to a long-term contract with the Emitter, pursuant to which the Project Company will install the carbon capture equipment on or adjacent to the Emitter’s

facility and will have rights to capture carbon oxide emissions. The contract with the Emitter may provide for either a fixed or variable payment for the right to capture or purchase the carbon oxide emissions. The contract may also permit the Project Company to capture the Emitter’s entire emission stream or may specify a minimum amount of carbon oxide that the Emitter must supply to the Project Company. The Project Company will also be party to a long-term contract with the Offtaker, pursuant to which the Offtaker will undertake to purchase carbon oxide from the Project Company. That contract may be at a fixed or variable price and may provide a commitment from the Offtaker to purchase all of the Project Company’s carbon oxide. The Offtaker will also agree to use the carbon oxide as a tertiary injectant in enhanced oil recovery and store it in secure geological storage, and avoid any release of the stored carbon oxide. These agreements will provide for remedies for breach of contract. Neither the Developer nor any person involved in the Project Compa

ny will provide a guarantee or otherwise insure the Investor’s ability to claim the Section 45Q Credit, the cash equivalent of the credit, or the repayment of any portion of the Investor’s contribution due to inability to claim the Section 45Q Credit, or 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 sale right, described in section 4.06 of this revenue procedure, at fair market value, as described in section 4.07 of this revenue procedure).

(4) Pursuant to the Project Company operating agreement (Operating Agreement), the Developer will have the right to manage the Project Company, subject to the right of the Investor to consent to certain activities. The Operating Agreement also provides that all allocations must satisfy the requirements of section 704(b) and the regulations thereunder.

(5) Below are a chart and an explanation that describe the distribution and allocation provisions applicable to Developer and Investor over various time periods.

(a) During Period 1, 99 percent of the Project Company’s gross income or loss and the Section 45Q Credit will be allocated to the Investor, and the remainder will be allocated to the Developer, and 100 percent of the Project Company’s cash flows will be distributed to the Developer. Period 1 will continue until the earlier of: (i) the date that the Developer receives an agreed cash return, which may be an amount equal to the aggregate contributions made by the Developer; or (ii) a fixed outside date. When Period 1 ends, Period 2 begins.

(b) During Period 2, 99 percent of the Project Company’s gross income or loss and the Section 45Q Credit will be allocated to the Investor, the remainder will be

allocated to the Developer, and 100 percent of the Project Company’s cash flows will be distributed to the Investor. Period 2 will continue until the Investor achieves an agreed after-tax internal rate of return (Flip Point). When Period 2 ends, Period 3 begins. If the Flip Point occurs before Period 1 ends, Period 1 ends at that time, and Period 3 begins.

(c) During Period 3, five percent of the Project Company’s gross income or loss and the Section 45Q Credit will be allocated to, and five percent of the Project Company’s cash flows will be distributed to, the Investor, and 95 percent of the Project Company’s gross income or loss and the Section 45Q Credit will be allocated to, and 95 percent of the Project Compa

ny’s cash flows will be distributed to, the Developer. Period 3 will continue for the remaining life of the project.

.02 Conclusion . Under the facts set forth in section 5.01 of this revenue procedure, the IRS will treat the Investor as a partner in the Project Company and will treat the Project Company as properly allocating the Section 45Q Credit in accordance with section 704(b) and the regulations thereunder.