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As we covered in Part I of this entry, when a buyer purchases a tax credit from the seller, it seems clear that policy weighs in favor of placing the onus of recapture on the seller. The statutory language, as is often the case, isn’t quite as clear - at least at first. After a closer read, it seems the statute also indicates that Congress intended to place the onus on the seller.
While Section 6418 the statute starts out with language implying that the buyer is responsible by stating that “the transferee taxpayer specified in such election… shall be treated as the taxpayer for purposes of this title with respect to such credit.” That, alone, may give the impression that the transferee taxpayer (i.e. the buyer) may be the person responsible for paying recapture because it is treated as the “taxpayer” with respect to the credit.
However, a closer examination belies that initial impression. If we look at the language in the code related to the recapture provision, it states (with emphasis added):
If, during any taxable 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, then the tax under this chapter for such taxable year shall be increased by the recapture percentage of the aggregate decrease in the credits allowed under section 38 for all prior taxable years which would have resulted solely from reducing to zero any credit determined under this subpart with respect to such property.
After parsing this provision further, it seems pretty clear that the buyer was not intended to be the “taxpayer” for purposes of the recapture provision. Taking a step back, it is important to recognize that the buyer of the tax credit never owns the tax credit property and the relevant property is never investment tax credit property with respect to the buyer of the tax credit. Therefore, the buyer of the tax credit can’t dispose of the tax credit property and the property can’t cease to be investment credit property with respect to the buyer. If one believed that the recapture provisions were intended to be applied by inserting the buyer of the tax credit as the “taxpayer,” then that would make the recapture provisions effectively neutered since it would mean that there could never be a disposition by the “taxpayer.”
Assuming one believes that Congress did not intend to neuter the recapture provisions (which seems pretty clear by the insertion of Section 6418(c) which is discussed below), then one has to conclude that “taxpayer” in the context of the recapture provisions is not the buyer of the tax credit, but remains the seller of the tax credit (which, as noted above, makes complete sense since that is the party that can dispose of the property and it would be supportive of the policy goals that led to transferability of tax credits in the first instance).
There are some specific provisions in Section 6418(c) that relate to the exchange of information. However, these provisions don’t add much to the discussion. These provisions provide that the “eligible taxpayer” (i.e. the seller of the tax credit) must provide notice to the “transferee taxpayer” (i.e. the buyer of the tax credit) and the buyer of the tax credit must provide the “recapture amount” back to the seller. After this exchange, both parties have the needed information to determine the amount of the increase in tax, which is the amount that the buyer provides to the seller at the end of this exchange.
All in all, given the clear policy mandates and statutory analysis above, it seems pretty clear that it would be prudent for the government to issue regulations that keep the onus of transferability with the seller. Whether that will be the case, only time will tell.
In either case, we at Atheva are working hard to make sure that buyers are protected from recapture risk no matter what the IRS decides. Feel free to sign up below or contact us to learn more.
